Limoneira CO - Quarter Report: 2015 July (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

FOR THE QUARTERLY PERIOD ENDED July 31, 2015

OR

FOR THE TRANSITION PERIOD FROM              TO             

Commission File Number: 001-34755

Limoneira Company

(Exact name of Registrant as Specified in its Charter)

Registrant’s telephone number, including area code: (805) 525-5541

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). x Yes ¨ No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ¨ Yes x  No

As of August 31, 2015, there were 14,128,830 shares outstanding of the registrant’s common stock.

LIMONEIRA COMPANY

TABLE OF CONTENTS

Cautionary Note on Forward-Looking Statements.

This Quarterly Report on Form 10-Q contains both historical and forward-looking statements. Forward-looking statements in this 10-Q are subject to a number of risks and uncertainties, some of which are beyond the Company’s control. The potential risks and uncertainties that could cause our actual financial condition, results of operations and future performance to differ materially from those expressed or implied include:

The Company’s actual results, performance, prospects or opportunities could differ materially from those expressed in or implied by the forward-looking statements. Additional risks of which the Company is not currently aware or which the Company currently deems immaterial could also cause the Company’s actual results to differ, including those discussed in the section entitled “Risk Factors” included elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended October 31, 2014. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. Except as required by law, we undertake no obligation to update these forward-looking statements, even if our situation changes in the future.

The terms the “Company,” “Limoneira”, “we,” “our” and “us” as used throughout this Quarterly Report on Form 10-Q refer to Limoneira Company and its consolidated subsidiaries, unless otherwise indicated.

PART I. FINANCIAL INFORMATION

Limoneira Company

Consolidated Balance Sheets (unaudited)

The accompanying notes are an integral part of these unaudited consolidated financial statements

Limoneira Company

Consolidated Statements of Operations (unaudited)

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Limoneira Company

Consolidated Statements of Comprehensive Income (unaudited)

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Limoneira Company

Consolidated Statements of Cash Flows (unaudited)

Limoneira Company

Consolidated Statements of Cash Flows (unaudited) (continued)

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Limoneira Company

Consolidated Financial Statements (unaudited)

Preface

The preparation of the unaudited interim consolidated financial statements requires management to make use of estimates and assumptions that affect the reported amount of assets and liabilities, revenue and expenses and certain financial statement disclosures. Actual results may differ from these estimates.

The unaudited interim consolidated financial statements for the three months and nine months ended July 31, 2015 and 2014 and balance sheet as of July 31, 2015 included herein have not been audited by an independent registered public accounting firm, but in management’s opinion, all adjustments (consisting of normal recurring adjustments) necessary to make a fair statement of the financial position at July 31, 2015 and the results of operations and the cash flows for the periods presented herein have been made. The results of operations for the three and nine months ended July 31, 2015 are not necessarily indicative of the operating results expected for the full fiscal year.

The consolidated balance sheet at October 31, 2014 included herein has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements.

The unaudited interim consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). Although we believe the disclosures made are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules or regulations. These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended October 31, 2014.

Limoneira Company

Notes to Consolidated Financial Statements (unaudited)

1. Business

Limoneira Company, a Delaware corporation (the “Company”), engages primarily in growing citrus and avocados, picking and hauling citrus, and packing, marketing and selling lemons. The Company is also engaged in residential rentals and other rental operations and real estate development activities.

The Company markets and sells lemons directly to foodservice, wholesale and retail customers throughout the United States, Canada, Asia and other international markets. The Company is a member of Sunkist Growers, Inc. (“Sunkist”), an agricultural marketing cooperative, and sells its oranges, specialty citrus and other crops to Sunkist-licensed and other third-party packinghouses.

The Company sells all of its avocado production to Calavo Growers, Inc. (“Calavo”), a packing and marketing company listed on the NASDAQ Global Select Market under the symbol CVGW. Calavo’s customers include many of the largest retail and food service companies in the United States and Canada. The Company’s avocados are packed by Calavo, sold and distributed under Calavo brands to its customers.

The unaudited interim consolidated financial statements include the accounts of the Company and the accounts of all the subsidiaries and investments in which a controlling interest is held by the Company. The unaudited interim consolidated financial statements represent the consolidated balance sheets, consolidated statements of operations, consolidated statements of comprehensive income and consolidated statements of cash flows of the Company and its wholly-owned subsidiaries. The Company’s subsidiaries include: Limoneira International Division, LLC, Limoneira Mercantile, LLC, Windfall Investors, LLC, Templeton Santa Barbara, LLC, and Associated Citrus Packers, Inc. All significant intercompany balances and transactions have been eliminated in consolidation. The Company considers the criteria established under the Financial Accounting Standards Board – Accounting Standards Code (“FASB ASC”) 810, Consolidations and the effect of variable interest entities, in its consolidation process. These unaudited consolidated financial statements should be read in conjunction with the notes thereto included in this quarterly report.

2. Summary of Significant Accounting Policies

Reclassifications and Adjustments

Certain reclassifications have been made to the prior years’ consolidated financial statements to conform to the July 31, 2015 presentation.

Immaterial Classification Error - An immaterial error in the classification of an equity method investee’s distributions was corrected in the July 31, 2014 consolidated financial statements which resulted in the reclassification of an equity method investee’s distributions from investing to operating cash flows in the amount of  $184,000 in the consolidated statement of cash flows. The Company has evaluated the materiality of this error both qualitatively and quantitatively in accordance with Staff Accounting Bulletin No. 99, Materiality, and determined that this error was not material to our previously reported consolidated financial statements as of October 31, 2014 and prior.

Other Reclassifications - Equity in earnings of investments were reclassified as a component of other income (expense) from a separate line item following the income tax provision on the statement of operations.

Recent Accounting Pronouncements

Financial Accounting Standards Board – Accounting Standards Update (“FASB ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606).

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” This ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition – Construction-Type and Production-Type Contracts. In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer (e.g., assets within the scope of Topic 360, Property, Plant, and Equipment, and tangible assets within the scope of Topic 350, Intangibles – Goodwill and Other) are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in this ASU.

Limoneira Company

Notes to Consolidated Financial Statements (unaudited) (continued)

2. Summary of Significant Accounting Policies (continued)

The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps:

The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is not permitted. The Company is evaluating the effect this ASU may have on its consolidated financial statements.

FASB Accounting Standards Update No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs

The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU.

The amendments are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

FASB Accounting Standards Update No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory

The amendments in this ASU do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost.

An entity should measure in scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method.

The amendments in this ASU more closely align the measurement of inventory in GAAP with the measurement of inventory in International Financial Reporting Standards.

For public business entities, the amendments are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. The amendments should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

Limoneira Company

Notes to Consolidated Financial Statements (unaudited) (continued)

3. Fair Value Measurements

Under the FASB ASC 820, Fair Value Measurement and Disclosures, a fair value measurement is determined based on the assumptions that a market participant would use in pricing an asset or liability. A three-tiered hierarchy draws distinctions between market participant assumptions based on (i) observable inputs such as quoted prices in active markets (Level 1), (ii) inputs other than quoted prices in active markets that are observable either directly or indirectly (Level 2) and (iii) unobservable inputs that require the Company to use present value and other valuation techniques in the determination of fair value (Level 3).

The following table sets forth the Company’s financial assets and liabilities as of July 31, 2015 and October 31, 2014, which are measured on a recurring basis during the period, segregated by level within the fair value hierarchy: 

July 31, 2015

October 31, 2014

Available-for-sale securities consist of marketable securities in Calavo common stock. The Company currently owns 500,000 shares, representing approximately 2.9% of Calavo’s outstanding common stock. These securities are measured at fair value by quoted market prices. Calavo’s stock price at July 31, 2015 and October 31, 2014 was $54.51 and $48.54 per share, respectively.

The derivative consists of an interest rate swap, the fair value of which is estimated using industry-standard valuation models. Such models project future cash flows and discount the future amounts to a present value using market-based observable inputs.

4. Accounts Receivable

The Company grants credit in the course of its operations to customers, cooperatives, companies and lessees of the Company’s facilities. The Company performs periodic credit evaluations of its customers’ financial condition and generally does not require collateral. The Company provides allowances on its receivables, as required, based on accounts receivable aging and certain other factors. As of July 31, 2015 and October 31, 2014 the allowances totaled $163,000 and $442,000, respectively.

5. Concentrations

Lemons procured from third-party growers were 25% and 23% of lemon supply in the three months ended July 31, 2015 and 2014, respectively and 35% and 20% of lemon supply in the nine months ended July 31, 2015 and 2014, respectively.

The Company sells all of its avocado production to Calavo.

Limoneira Company

Notes to Consolidated Financial Statements (unaudited) (continued)

6. Real Estate Development Assets

Real estate development assets consist of the following:

East Areas 1 and 2

In fiscal year 2005, the Company began capitalizing the costs of two real estate development projects east of Santa Paula, California, for the development of 550 acres of land into residential units, commercial buildings and civic facilities. During the three months ended July 31, 2015 and 2014, the Company capitalized $1,434,000 and $827,000, respectively, of costs related to these projects. During the nine months ended July 31, 2015 and 2014, the Company capitalized $3,516,000 and $2,333,000, respectively, of costs related to these projects. Additionally, in relation to these projects, the Company incurred expenses of $4,000 in each of the three months ended July 31, 2015 and 2014 and $12,000 and $13,000 in the nine months ended July 31, 2015 and 2014, respectively.

On August 24, 2010, the Company entered into an amendment (the “Amendment”) to a Real Estate Advisory Management Consultant Agreement (the “Consultant Agreement”) with Parkstone Companies, Inc. (the “Consultant”) dated April 1, 2004, that includes provisions for the Consultant to earn a success fee (the “Success Fee”) upon the annexation by the City of Santa Paula, California of East Area I. Under the terms of the Amendment, the Company agrees to pay the Success Fee in an amount equal to 4% of the incremental Property Value under a formula defined in the Amendment.  The Success Fee is due and payable 120 days following the earlier to occur of (a) the sale of all or any portion of East Area I, including any unrelated third party material investment in the property, (b) the determination of an appraised value of the East Area I or (c) the second anniversary of the property annexation (each a “Success Fee Event”).

The Success Fee, if any, shall be paid in cash, shares of the Company’s common stock, or any combination of the forgoing at the sole discretion of the Company.  The Success Fee is based on the calculated value of the property, which can vary over time until the settlement date. Accordingly, the Success Fee will be “marked to market” periodically to recognize the potential variability in the property value. Changes in the value, if any, will be recorded to capitalized development costs and additional paid in capital (“APIC”). To the extent that it becomes probable that cash will be used in the settlement rather than stock, such amount of cash will be classified as a liability rather than APIC.

If the Success Fee is paid in shares of common stock, deemed to be an equity award, the amount of common stock paid will be determined using a price per share equal to the average of closing prices of the common stock on the NASDAQ Global Market for the 20 trading days ending on the last trading day prior to the earliest occurring Success Fee Event; provided, however, that the price per share shall be no less than $16.00 per share. Previously recognized capitalized development costs will be adjusted to reflect the calculated value of the property upon settlement. The related APIC amount will be adjusted to common stock to reflect the issuance of common stock. To the extent that it becomes probable that cash will be used in the settlement rather than stock, such amount of cash will be classified as a liability rather than APIC/common stock. As of July 31, 2015, the estimated amount of the Success Fee was zero.

In connection with facilitating the annexation of East Area 1 into the City of Santa Paula, during February 2013, the Company entered into a Capital Improvement Cost Sharing Agreement for Improvements to Santa Paula Creek Channel (the “Cost Sharing Agreement”) with the Ventura County Watershed Protection District (the “District”). The Cost Sharing Agreement requires the Company to reimburse the District 28.5% of the costs of the improvements, up to a maximum of $5,000,000. Additionally, the Company is required to pay the cost of preparing a study to determine a feasible scope of work and budget for the improvements. No costs have been incurred to date in relation to this agreement. 

Limoneira Company

Notes to Consolidated Financial Statements (unaudited) (continued)

6. Real Estate Development Assets (continued)

Templeton Santa Barbara, LLC

The three real estate development parcels within the Templeton Santa Barbara, LLC project are described as Centennial Square (“Centennial”), The Terraces at Pacific Crest (“Pacific Crest”), and Sevilla. The net carrying values of Centennial, Pacific Crest and Sevilla at July 31, 2015 and October 31, 2014 were $2,983,000, $3,370,000 and $4,686,000, respectively. These projects were idle during the nine months ended July 31, 2015 and, as such, no costs were capitalized.

During the three months ended July 31, 2015 and 2014, the Company capitalized zero and $24,000, respectively, of costs related to these real estate parcels. During the nine months ended July 31, 2015 and 2014, the Company capitalized zero and $197,000, respectively, of costs related to these real estate parcels. Additionally, in relation to these parcels, the Company incurred net expenses of $42,000 and $465,000 in the three months ended July 31, 2015 and 2014, respectively, and $128,000 and $527,000 in the nine months ended July 31, 2015 and 2014, respectively. The net expenses incurred in fiscal year 2014 include a July 31, 2014 impairment charge of $435,000 recognized on the Centennial property.

Windfall Investors, LLC

On November 15, 2009, the Company acquired Windfall Investors, LLC, which included $16,842,000 of real estate development assets. During the three months ended July 31, 2015 and 2014, the Company capitalized $2,597,000 and $673,000, respectively, of costs primarily related to vineyards and water wells for this real estate development project. During the nine months ended July 31, 2015 and 2014, the Company capitalized $3,319,000 and $1,323,000, respectively, of costs primarily related to vineyards and water wells for this real estate development project. Additionally, in relation to this project, the Company incurred net expenses of $245,000 and $265,000, in the three months ended July 31, 2015 and 2014, respectively, and $604,000 and $720,000 in the nine months ended July 31, 2015 and 2014, respectively.

7. Investment in Calavo Growers, Inc.

In June 2005, the Company entered into a stock purchase agreement with Calavo. Pursuant to this agreement, the Company purchased 1,000,000 shares, or approximately 6.9%, of Calavo’s common stock for $10,000,000 and Calavo purchased 1,728,570 shares, or approximately 15.1%, of the Company’s common stock for $23,450,000. Under the terms of the agreement, the Company received net cash consideration of $13,450,000. The Company has classified its marketable securities investment as available-for-sale.

In fiscal year 2009, the Company sold 335,000 shares of Calavo stock for a total of $6,079,000, recognizing a gain of $2,729,000. In fiscal year 2013, the Company sold 165,000 shares to Calavo pursuant to the 2005 Stock Purchase Agreement for a total of $4,788,000, recognizing a gain of $3,138,000. The Company continues to own 500,000 shares of Calavo common stock.

Changes in the fair value of the available-for-sale securities result in unrealized holding gains or losses for the remaining shares held by the Company. The Company recorded unrealized holding gains of $1,930,000 ($1,172,000 net of tax) and $1,700,000 ($1,023,000 net of tax), during the three months ended July 31, 2015 and 2014, respectively. The Company recorded unrealized holding gains of $2,985,000 ($1,813,000 net of tax) and $2,400,000 ($1,445,000 net of tax), during the nine months ended July 31, 2015 and 2014, respectively.

8. Note Receivable

During fiscal year 2004, the Company sold a parcel of land in Morro Bay, California and in connection with the sale; the Company recorded a note receivable of $1,300,000. Total principal and interest due was $819,000 and $2,084,000 at July 31, 2015 and October 31, 2014, respectively. Interest continues to accrue on the principal balance of the note and was $12,000 and $20,000 in the three months ended July 31, 2015 and 2014, respectively and $36,000 and $59,000 in the nine months ended July 31, 2015 and 2014, respectively.

In July 2015, the holder of the note completed the drilling of three water wells at the Company’s Windfall Investors, LLC real estate development property. The fair value of the well drilling services was $1,301,000 and the Company recorded a non-cash reduction of the note receivable comprised of $820,000 in accrued interest and $481,000 of principal.

Limoneira Company

Notes to Consolidated Financial Statements (unaudited) (continued)

9. Other Assets

Other assets consist of the following:

10. Accrued Liabilities

Accrued liabilities consist of the following:

11. Long-Term Debt

Long-term debt is comprised of the following:

Limoneira Company

Notes to Consolidated Financial Statements (unaudited) (continued)

11. Long-Term Debt (continued)

Interest is capitalized on non-bearing orchards, real estate development projects and significant construction in progress. The Company capitalized interest of $651,000 and $559,000 during the three months ended July 31, 2015 and 2014, respectively, and $1,874,000 and $1,757,000 during the nine months ended July 31, 2015 and 2014, respectively. Capitalized interest is included in property, plant and equipment and real estate development assets in the Company’s consolidated balance sheets.

12. Derivative Instrument and Hedging Activities

The Company enters into interest rate swaps to minimize the risks and costs associated with its financing activities. Derivative financial instruments are as follows:

In November 2011, the Company entered into a forward interest rate swap agreement with Rabobank International, Utrecht to fix the interest rate at 4.30% on $40,000,000 of its outstanding borrowings under the Rabobank line of credit beginning July 2013 until June 2018. This interest rate swap qualifies as a cash flow hedge and is accounted for as a hedge under the short-cut method. Therefore, the fair value liability is included in fair value of derivative instrument, other long-term liabilities and related accumulated other comprehensive income at July 31, 2015 and October 31, 2014.

13. Basic and Diluted Net Income per Share

Basic net income per common share is calculated using the weighted-average number of common shares outstanding during the period without consideration of the dilutive effect of conversion of preferred stock. Diluted net income per common share is calculated using the weighted-average number of common shares outstanding during the period plus the dilutive effect of conversion of preferred stock. The Series B and Series B-2 convertible preferred shares were included in the computation of diluted net income per common share for the three months ended July 31, 2015 because such shares were dilutive. The Series B and Series B-2 convertible preferred shares were excluded from the computation of diluted net income per common share for the nine months ended July 31, 2015 and 2014 because such shares were anti-dilutive.

14. Related-Party Transactions

The Company rents certain of its residential housing assets to employees on a month-to-month basis. The Company recorded $166,000 and $132,000 of rental revenue from employees in the three months ended July 31, 2015 and 2014, respectively. The Company recorded $459,000 and $405,000 of rental revenue from employees in the nine months ended July 31, 2015 and 2014, respectively. There were no rental payments due from employees at July 31, 2015 and October 31, 2014.

The Company has representation on the boards of directors of the mutual water companies in which the Company has investments. The Company recorded capital contributions and purchased water and water delivery services from such mutual water companies, in aggregate, of $364,000 and $202,000 in the three months ended July 31, 2015 and 2014, respectively. The Company recorded capital contributions and purchased water and water delivery services from such mutual water companies, in aggregate, of $1,067,000 and $947,000 in the nine months ended July 31, 2015 and 2014, respectively. Such amounts are included in agribusiness expense in the Company’s consolidated statements of operations. Payments due to the mutual water companies were, in aggregate, $141,000 and $74,000 at July 31, 2015 and October 31, 2014, respectively.

Limoneira Company

Notes to Consolidated Financial Statements (unaudited) (continued)

14. Related-Party Transactions (continued)

The Company has representation on the board of directors of a non-profit cooperative association that provides pest control services for the agricultural industry. The Company purchased services and supplies of $382,000 and $438,000 from the association in the three months ended July 31, 2015 and 2014, respectively. The Company purchased services and supplies of $1,081,000 and $989,000 from the association in the nine months ended July 31, 2015 and 2014, respectively. Such amounts are included in agribusiness expense in the Company’s consolidated statements of operations. Payments due to the association were $7,000 and $177,000 at July 31, 2015 and October 31, 2014, respectively.

The Company recorded dividend income of $375,000 and $350,000 in the nine months ended July 31, 2015 and 2014, respectively, on its investment in Calavo, which is included in other income (expense), net in the Company’s consolidated statements of operations. The Company had $3,027,000 and $6,147,000 of avocado sales to Calavo for the three months ended July 31, 2015 and 2014, respectively. The Company had $7,142,000 and $7,320,000 of avocado sales to Calavo for the nine months ended July 31, 2015 and 2014, respectively. Such amounts are included in agribusiness revenues in the Company’s consolidated statements of operations. There was $189,000 and zero receivable by the Company from Calavo at July 31, 2015 and October 31, 2014, respectively. Additionally, the Company leases office space to Calavo and received rental income of $68,000 and $69,000 in the three months ended July 31, 2015 and 2014, respectively. The Company received rental income from Calavo of $204,000 and $207,000 in the nine months ended July 31, 2015 and 2014, respectively. Such amounts are included in rental operations revenues in the Company’s consolidated statements of operations.

Certain members of the Company’s board of directors market lemons through the Company pursuant to its customary marketing agreements. During the three months ended July 31, 2015 and 2014, the aggregate amount of lemons procured from entities owned or controlled by members of the board of directors was $774,000 and $915,000, respectively. During the nine months ended July 31, 2015 and 2014, the aggregate amount was $1,356,000 and $1,311,000, respectively. Such amounts are included in agribusiness expense in the Company’s consolidated statements of operations. Payments due to these board members were $284,000 and $592,000 at July 31, 2015 and October 31, 2014, respectively.

On July 1, 2013, the Company and Cadiz Real Estate, LLC (“Cadiz”), a wholly-owned subsidiary of Cadiz, Inc., entered into a long-term lease agreement (the “Lease”) for a minimum of 320 acres, with an option to lease up to an additional 640 acres, located within 9,600 zoned agricultural acres owned by Cadiz in eastern San Bernardino County, California. The initial term of the Lease runs for 20 years and the annual base rental rate will be equal to the sum of $200 per planted acre and 20% of gross revenues from the sale of harvested lemons (less operating expenses) and will not exceed $1,200 per acre per year. The Company has incurred lease expense of $16,000 and $11,000 in the three months ended July 31, 2015 and 2014, respectively and $41,000 and $15,000 in the nine months ended July 31, 2015 and 2014, respectively. A member of the Company’s board of directors serves as the CEO, President and a member of the board of directors of Cadiz, Inc. Additionally, this board member is an attorney with a law firm that provided services to the Company $122,000 and $71,000 in the nine months ended July 31, 2015 and 2014, respectively.

On February 3, 2015, the Company entered into a Modification of Lease Agreement (the “Amendment”) with Cadiz. The Amendment, among other things, increased by 200 acres the amount of property leased by the Company under the lease agreement dated July 1, 2013. In connection with the Amendment, the Company paid a total of $1,212,000 to acquire existing lemon trees and irrigations systems from Cadiz and a Cadiz tenant.

The Company has representation on the board of directors of Colorado River Growers, Inc. (“CRG”), a non-profit cooperative association of fruit growers engaged in the agricultural harvesting and marketing business in Yuma County, Arizona. The Company paid no harvest and third-party grower expense to CRG in the three months ended July 31, 2014 and 2014 and $5,177,000 and $5,505,000 in the nine months ended July 31, 2015 and 2014, respectively. Such amounts are included in agribusiness expense in the Company’s consolidated statements of operations. Additionally, the Company’s subsidiary, Associated Citrus Packers, Inc. (“Associated”) provided no harvest management and administrative services to CRG in the three months ended July 31, 2015 and 2014 and $305,000 and $295,000 in the nine months ended July 31, 2015 and 2014, respectively. Such amounts are included in agribusiness revenues in the Company’s consolidated statements of operations. There was $33,000 and $40,000 receivable by Associated from CRG at July 31, 2015 and October 31, 2014, respectively.

Limoneira Company

Notes to Consolidated Financial Statements (unaudited) (continued)

14. Related-Party Transactions (continued)

The Company has representation on the board of directors of Yuma Mesa Irrigation and Drainage District (“YMIDD”). In December 2013, Associated entered into an agreement, as amended in December 2014, with the YMIDD to participate in a Pilot Fallowing Program in which Associated agreed to forego its water allocation for approximately 300 acres of land in exchange for $750 per acre through December 31, 2016, unless terminated sooner by YMIDD. In relation to this program, during the three months ended July 31, 2015 and 2014 the Company recorded income of $50,000 and $43,000, respectively. In relation to this program, during the nine months ended July 31, 2015 and 2014 the Company recorded income of $151,000 and $111,000, respectively, and recorded losses on orchard disposals of $160,000 and $183,000, respectively. These net amounts are included in other income in the Company’s consolidated statements of operations. Additionally, the Company purchased no water from YMIDD in the three months ended July 31, 2015 and 2014 and $68,000 and $62,000 in the nine months ended July 31, 2015 and 2014, respectively. Such amounts are included in agribusiness expenses in the Company’s consolidated statements of operations. There were no amounts receivable from or payments due to YMIDD at July 31, 2015 and October 31, 2014.

The Company has a 1.3% interest in Limco Del Mar, Ltd. (“Del Mar”) as a general partner and a 22.1% interest as a limited partner. The Company provides Del Mar with farm management, orchard land development and accounting services, and recognized agribusiness revenue relating to such services of $44,000 and $40,000 in the three months ended July 31, 2015 and 2014, respectively, and $119,000 in the nine months ended July 31, 2015 and 2014. The Company also performed contract lemon packing services for Del Mar and recognized agribusiness revenues relating to such services of $367,000 and $396,000 in the three months ended July 31, 2015 and 2014, respectively and $470,000 and $517,000 in the nine months ended July 31, 2015 and 2014, respectively. Fruit proceeds due to Del Mar were $882,000 and $828,000 at July 31, 2015 and October 31, 2014, respectively, and are included in grower’s payable in the Company’s consolidated balance sheets. In the three months ended July 31, 2015 and 2014, the Company received no cash distributions and recorded equity in earnings of this investment of $225,000 and $101,000, respectively. In the nine months ended July 31, 2015 and 2014, the Company received cash distributions of $495,000 and $184,000, respectively and recorded equity in earnings of this investment of $412,000 and $132,000, respectively.

On August 14, 2014, the Company’s wholly owned subsidiary, Limoneira Chile SpA, invested approximately $1,750,000 for a 35% interest in Rosales S.A. (“Rosales”), a citrus packing, marketing and sales business located in La Serena, Chile. The Company recognized lemon sales of zero and $119,000 to Rosales in the three and nine months ended July 31, 2015, respectively and such amounts are recorded in agribusiness revenues in the Company’s consolidated statements of operations. During the three months ended July 31, 2015 and 2014, the aggregate amount of lemons procured from Rosales was $415,000 and $555,000, respectively. During the nine months ended July 31, 2015 and 2014, the aggregate amount procured was $567,000 and $555,000, respectively. Amounts due to Rosales were $259,000 and zero at July 31, 2015 and October 31, 2014. Additionally, the Company recorded equity losses of this investment of $19,000 and $220,000, which includes amortization of fair value basis differences of $52,000 and $156,000 in the three and nine months ended July 31, 2015, respectively. In August 2015 the Company received a cash distribution of $53,000.

15. Income Taxes

There has been no material change to the Company’s uncertain tax position for the three and nine month periods ended July 31, 2015. The Company does not expect its unrecognized tax benefits to change significantly over the next 12 months.

The Company’s policy is to recognize interest expense and penalties related to income tax matters as a component of income tax expense. The Company has not accrued any interest and penalties associated with uncertain tax positions as of July 31, 2015.

Limoneira Company

Notes to Consolidated Financial Statements (unaudited) (continued)

16. Retirement Plans

The Limoneira Company Retirement Plan (the “Plan”) is a noncontributory, defined benefit, single employer pension plan, which provides retirement benefits for all eligible employees of the Company. Benefits paid by the Plan are calculated based on years of service, highest five-year average earnings, primary Social Security benefit and retirement age. Effective June 2004, the Company froze the Plan and no additional benefits accrued to participants subsequent to that date. The Plan is administered by City National Bank and Mercer Human Resource Consulting.

The Plan is funded consistent with the funding requirements of federal law and regulations. There were funding contributions of $125,000 during the three months ended July 31, 2015 and 2014, and $375,000 during the nine months ended July 31, 2015 and 2014. 

The net periodic pension costs for the Plan for the three months ended July 31 were as follows:

The net periodic pension costs for the Plan for the nine months ended July 31 were as follows:

17. Other Long-Term Liabilities

Other long-term liabilities consist of the following:

Limoneira Company

Notes to Consolidated Financial Statements (unaudited) (continued)

18. Stock-based Compensation

As of July 31, 2015, there are 7,810 shares of common stock issued to employees in connection with a discontinued stock option plan. Such shares are subject to repurchase by the Company and constitute a liability due to the repurchase right. The repurchase obligation of $6,000 is included in other long-term liabilities in the Company’s consolidated balance sheets at July 31, 2015 and October 31, 2014.

The Company has a stock-based compensation plan (the “Stock Plan”) that allows for the grant of common stock of the Company to members of management based on achievement of certain annual financial performance and other criteria. The number of shares granted is based on a percentage of the employee’s base salary divided by the stock price on the grant date. Shares granted under the Stock Plan generally vest over a two year period.

During December 2014, 42,085 shares of common stock were granted to management under the Stock Plan for fiscal year 2014 performance, resulting in total compensation expense of approximately $1,071,000, with $367,000 recognized in the year ended October 31, 2014 and the balance to be recognized over the next two years as the shares vest.  During December 2013, 27,091 shares of common stock were granted to management under the Stock Plan for fiscal 2013 performance, resulting in a total compensation expense of approximately $727,000, with $253,000 recognized in the year ended October 31, 2013 and the balance to be recognized over the next two years as the shares vest. During December 2012, 34,721 shares of common stock were granted to management under the Stock Plan for fiscal year 2012 performance, resulting in total compensation expense of approximately $657,000, with $216,000 recognized in the year ended October 31, 2012 and the balance to be recognized over the next two years as the shares vest.

Stock-based compensation expense is included in selling, general and administrative expense and is recognized over the performance and vesting periods as summarized below:

During December 2014 and January 2015, members of management exchanged a total of 10,907 shares of common stock with a total market price value of $275,000 at the date of the exchanges, for the payment of payroll taxes associated with the vesting of shares under the Stock Plan.

During January 2015 and 2014, 15,077 and 13,587 shares, respectively, of common stock were granted to the Company’s non-employee directors under the Company’s stock-based compensation plans. The Company recognized $325,000 and $303,000 of stock-based compensation to non-employee directors during the nine months ended July 31, 2015 and 2014, respectively.

On June 25, 2015 the Company’s board of directors authorized a donation of $100,000 of the Company’s common stock to the Museum of Ventura County (the “Museum”), a California non-profit corporation. On June 30, 2015, the Company issued 4,498 unregistered shares of the Company’s common stock with a per share value of $22.23 at the date of issuance. The donation is to be used by the Museum to establish and operate an agriculture museum in Santa Paula, California depicting the history of agriculture in Ventura County.

Limoneira Company

Notes to Consolidated Financial Statements (unaudited) (continued)

19. Segment Information

The Company operates in three reportable operating segments: agribusiness, rental operations, and real estate development. The reportable operating segments of the Company are strategic business units with different products and services, distribution processes and customer bases. The agribusiness segment includes farming and citrus packing operations. The rental operations segment includes residential and commercial rental operations, leased land, and organic recycling. The real estate development segment includes real estate development operations. No asset information is provided for reportable segments as these specified amounts are not included in the measure of segment profit or loss reviewed by the company’s chief operating decision maker. The Company measures operating performance, including revenues and earnings, of its operating segments and allocates resources based on its evaluation. The Company does not allocate selling, general and administrative expense, other income (expense), interest expense and income tax expense, or specifically identify them to its operating segments.

Segment information for the three months ended July 31, 2015:

Segment information for the three months ended July 31, 2014:

The following table sets forth revenues by category, by segment for the three months ended:

Limoneira Company

Notes to Consolidated Financial Statements (unaudited) (continued)

19. Segment Information (continued)

Segment information for the nine months ended July 31, 2015

Segment information for the nine months ended July 31, 2014:

The following table sets forth revenues by category, by segment for the nine months ended:

Limoneira Company

Notes to Consolidated Financial Statements (unaudited) (continued)

20. Acquisitions and Sale of Property

In July 2015, the Company entered into a purchase agreement to acquire 157 acres of lemon, orange and specialty citrus orchards in California’s San Joaquin Valley for approximately $3,300,000. The orchards are being acquired pursuant to purchase options contained in certain operating leases the Company has had since 2012 for approximately 1,000 acres of lemon, orange and specialty citrus and other crops, which the Company refers to as the Sheldon Ranch leases. The Company paid a deposit of $50,000 and escrow is expected to close in September 2015.

In September 2015, the Company entered into a purchase agreement to acquire 757 acres of lemon, orange and specialty citrus orchards in California’s San Joaquin Valley, for approximately $15,100,000. The orchards are being acquired pursuant to purchase options contained in the Sheldon Ranches operating leases. The Company paid a deposit of $50,000 and escrow is expected to close in November 2015.

On August 21, 2015, the Company sold its Wilson Ranch, which is comprised of 52 acres of land with 33 acres of avocado orchards located near the City of Fillmore, in Ventura County, California. The sales price was $2,750,000 and the gain on the sale was $935,000.

21. East Area 1 Joint Venture Development Agreement

In September 2015, the Company entered into a Contribution Agreement with an affiliate of Lewis Operating Corp. (“Lewis”), a Southern California land developer, that facilitates upon the completion of certain conditions, the formation of a joint venture for the purpose of developing the Company’s East Area 1 real estate development project (the “Joint Venture”). The Company was paid a $2,000,000 deposit upon entering into the Contribution Agreement. Conditions necessary to close the transaction and form the Joint Venture include approval by the City of Santa Paula of an amendment to the East Area 1 tentative tract map, assignment of various development rights and obligations by the Company to the Joint Venture, completion of a legal parcel map and contribution of the East Area 1 property to the Joint Venture and the payment by Lewis of $18,000,000, comprising total consideration of $20,000,000 for a 50% interest in the Joint Venture. The Contribution Agreement also includes an agricultural lease that allows the Company to continue farming the property during the phased build-out of the project. The Joint Venture partners will share equally in capital contributions to fund project costs until project loan proceeds and or revenues are sufficient to fund the project. In addition, upon closing the transaction, the Company is expected to incur a minimum Capital Placement fee to a consultant of approximately $500,000 plus 2% of the initial land value received by the Company in excess of $100,000,000 to be earned on the successful closing of the Joint Venture transaction.

22. Subsequent Events

The Company has evaluated events subsequent to July 31, 2015 through the filing date to assess the need for potential recognition or disclosure in this Quarterly Report on Form 10-Q. Based upon this evaluation, except as disclosed in the notes to consolidated financial statements, it was determined that no subsequent events occurred that require recognition or disclosure in the unaudited consolidated financial statements.

Overview

Limoneira Company was incorporated in Delaware in 1990 as the successor to several businesses with operations in California since 1893. We also have agricultural operations in Yuma, Arizona, through our subsidiary, Associated Citrus Packers, Inc. (“Associated”) and in Chile in connection with our 35% interest in Rosales S.A., a citrus packing, marketing and sales business located in La Serena. We are an agribusiness and real estate development company founded and based in Santa Paula, California, committed to responsibly using and managing our approximately 10,700 acres of land, water resources and other assets to maximize long-term shareholder value. Our current operations consist of fruit production, sales and marketing, real estate development and capital investment activities.

We are one of California’s oldest citrus growers. According to Sunkist Growers, Inc. (“Sunkist”), we are one of the largest growers of lemons in the United States and, according to the California Avocado Commission, one of the largest growers of avocados in the United States. In addition to growing lemons and avocados, we grow oranges and a variety of specialty citrus and other crops. We have agricultural plantings throughout Ventura and Tulare Counties in California and in Yuma County in Arizona, which plantings consist of approximately 4,200 acres of lemons, 1,200 acres of avocados, 1,400 acres of oranges and 700 acres of specialty citrus and other crops. We also operate our own packinghouses in Santa Paula, California and Yuma, Arizona, where we process and pack lemons that we grow, as well as lemons grown by others.

Our water resources include water rights, usage rights and pumping rights to the water in aquifers under, and canals that run through, the land we own. Water for our farming operations is sourced from the existing water resources associated with our land, which includes rights to water in the adjudicated Santa Paula Basin (aquifer) and the un-adjudicated Fillmore, Santa Barbara and Paso Robles Basins (aquifers). We use ground water and water from local water districts in Tulare County, which is in California’s San Joaquin Valley and we use ground water in San Bernardino County. We also use ground water in Arizona from the Colorado River through the Yuma Mesa Irrigation and Drainage District (“YMIDD”).

For more than 100 years, we have been making strategic investments in California agriculture and development real estate. We currently have five active real estate development projects in California. Our real estate developments include apartments, single-family homes and approximately 200 completed rental units and another approximately 1,800 units in various stages of planning and development.

Business Segment Summary

We have three business segments: agribusiness, rental operations and real estate development. Our agribusiness segment includes our farming and lemon packing and sales operations. Our rental operations segment includes our residential and commercial rental operations, leased land operations and organic recycling. Our real estate development segment includes our real estate development projects and development. From a general view, we see our Company as a land and farming company that generates annual cash flows to support its progress into diversified real estate development activities. As real estate developments are monetized, our agribusiness will then be able to expand more rapidly into existing and new regions and markets.

Agribusiness

We are one of the largest growers of lemons and avocados in the United States and, as a result, our agribusiness segment is the largest of our three segments, representing approximately 95%, 94% and 93% of our fiscal year 2014, 2013 and 2012 consolidated revenues, respectively. We market and sell lemons directly to our foodservice, wholesale and retail customers throughout the United States, Canada, Asia and other international markets. During the three months ended July 31, 2015, lemon sales were comprised of approximately 82% to U.S. and Canada-based customers, 15% to domestic exporters and 3% to international customers. During the nine months ended July 31, 2015, lemon sales were comprised of approximately 75% to U.S. and Canada-based customers, 21% to domestic exporters and 4% to international customers. We are a member of Sunkist, an agricultural marketing cooperative, and we sell our oranges, specialty citrus and other crops to Sunkist-licensed and other third-party packinghouses.

Our agribusiness operations are seasonal in nature with quarterly revenue fluctuating depending on the timing and variety of crops being harvested. Cultural costs in our agribusiness tend to be higher in the first and second quarters and lower in the third and fourth quarters because of the timing of expensing cultural costs in the current year that were inventoried in the prior year. Our harvest costs generally increase in the second quarter and peak in the third quarter coinciding with the increasing production and revenue.

Fluctuations in price are a function of global supply and demand with weather conditions, such as unusually low temperatures, typically having the most dramatic effect on the amount of lemons supplied in any individual growing season. We believe we have a competitive advantage by maintaining our own lemon packing operation, even though a significant portion of the costs related to our lemon packing operations are fixed. As a result, cost per carton is a function of fruit throughput. While we regularly monitor our costs for redundancies and opportunities for cost reductions, we also supplement the number of lemons we pack in our packinghouse with additional lemons from other growers. Because the fresh utilization rate for our lemons, or percentage of lemons we harvest and pack that go to the fresh market, is directly related to the quality of lemons we pack and, consequently, the price we receive per 40-pound box, we only pack lemons from other growers if we determine their lemons are of good quality.

Our avocado producing business is important to us yet nevertheless faces some constraints on growth as there is little additional land that can be cost-effectively acquired to support new avocado orchards in Southern California. Also, avocado production is cyclical as avocados typically bear fruit on a bi-annual basis with large crops in one year followed by smaller crops the next year. While our avocado production remains volatile, the profitability and cash flow realized from our avocados frequently offsets occasional losses in other crops we grow and helps to diversify our fruit production base.

In addition to growing lemons and avocados, we also grow oranges and specialty citrus and other crops, typically utilizing land not suitable for growing high quality lemons. We regularly monitor the demand for the fruit we grow in the ever-changing marketplace to identify trends. For instance, while per capita consumption of oranges in the United States has been decreasing since 2000 primarily as a result of consumers increasing their consumption of mandarin oranges and other specialty citrus, the international market demand for U.S. oranges has increased. As a result, we have focused our orange production on high quality late season Navel oranges primarily for export to Japan, China and Korea, which are typically highly profitable niche markets. We produce our specialty citrus and other crops in response to consumer trends we identify and believe that we are a leader in the niche production and sale of certain of these high margin fruits. Because we carefully monitor the respective markets of specialty citrus and other crops, we believe that demand for the types and varieties of specialty citrus and other crops that we grow will continue to increase throughout the world.

Rental Operations

Our rental operations segment represented approximately 4%, 5% and 6% of our fiscal year 2014, 2013 and 2012 consolidated revenues, respectively. Our rental housing units generate reliable cash flows which we use to partially fund the operations of all three of our business segments, and provide affordable housing to many of our employees, including our agribusiness employees, a unique employment benefit that helps us maintain a dependable, long-term employee base. In addition, our leased land business provides us with a typically profitable diversification. Revenue from our rental operations segment is generally level throughout the year.

Real Estate Development

Our real estate development segment represented 1% of our consolidated revenues in fiscal years 2014, 2013 and 2012. We recognize that long-term strategies are required for successful real estate development activities. Our goal is to redeploy real estate earnings and cash flow into the expansion of our agribusiness and other income producing real estate.

Water Resources and California Drought

Our water resources include water rights, usage rights and pumping rights to the water in aquifers under, and canals that run through the land we own. Water for our California farming operations is sourced from the existing water resources associated with our land, which includes rights to water in the adjudicated Santa Paula Basin (aquifer) and the un-adjudicated Fillmore and Paso Robles Basins (aquifers). We use ground water and water from local water districts in Tulare County and we use ground water in San Bernardino County. Following our acquisition of Associated we began using ground water in Arizona from the Colorado River through the YMIDD.

California has historically experienced periods of below average precipitation. Currently, it is experiencing one of its most severe droughts on record. Rainfall, snow levels and water content of snow pack are significantly below historical averages. These conditions have resulted in reduced water levels in streams, rivers, lakes, aquifers and reservoirs. The governor of California declared a drought State of Emergency in February 2014. Federal officials oversee the Central Valley Project, California’s largest water delivery system, and no water is expected to be provided to San Joaquin Valley farmers this year and only 50% of the contracted amount will be provided to urban areas from this water system.

The impact of the drought on water consumers varies with the sources of available water. Depending on the location of our agricultural operations, we obtain our water from aquifers, water delivered by water federal, state and local irrigation districts and rainfall.

Water for our farming operations located in Ventura County, California is sourced from the existing water resources associated with our land, which includes approximately 8,600 acre feet of adjudicated water rights in Santa Paula Basin (aquifer) and the un-adjudicated Fillmore Basin.

We use a combination of ground water provided by wells and water from various local water districts in Tulare County, California which is in the agriculturally productive San Joaquin Valley.

We use ground water provided by wells at the Cadiz Ranch in San Bernardino County, California.

Our Associated farming operations in Yuma, Arizona source water from the Colorado River through the YMIDD, where we have access to approximately 11,700 acre feet of Class 3 Colorado River water rights.

Our Windfall Farms property located in San Luis Obispo County obtains water from wells deriving water from the Paso Robles Basin.

For the fiscal year 2014, irrigation costs for our agricultural operations were $0.3 million greater than fiscal year 2013, resulting from pumping more water from wells and basins due to less rain fall. For the nine months ended July 31, 2015, irrigation costs were similar to the same period in fiscal year 2014. However, costs may increase as we pump more water than our historical averages and federal, state and local water delivery infrastructure costs, may increase to access these limited water supplies. In response to the drought, we have an ongoing plan for irrigation improvements in fiscal year 2015 that includes drilling new wells and upgrading existing wells and irrigation systems.

We believe we have access to adequate supplies of water for our agricultural operations as well as our real estate development and rental operations segments of our business and currently do not anticipate the California drought will have a material impact our operating results. However, if the current drought conditions persist or worsen or if regulatory responses to such conditions limit our access to water, our business could be negatively impacted by these conditions and responses in terms of access to water and/or cost of water.

China Tulare County Citrus Import Suspension

China’s Administration of Quality Supervision, Inspection and Quarantine has suspended imports of all citrus fruit from Tulare County, California effective February 17, 2015 due to the detection on certain fruit of Phytophthora syringae, commonly known as brown rot.  We do not expect the suspension to have a material effect on our 2015 operating results because we do not sell a significant amount of fruit to China.

Recent Developments 

In June 2013, we announced a plan to build 71 agriculture workforce housing units in Santa Paula, California. This project has been substantially completed and we began renting units in May 2015. When fully occupied, annual rental revenue from the additional housing units is anticipated to be approximately $0.9 million. We estimate that the total cost of the development will be approximately $8.8 million and have capitalized approximately $6.2 million of costs related to this project in the nine months ended July 31, 2015.

In December 2013, we entered into a construction contract that includes design and construction services for the expansion of our lemon packing facilities.  The project is expected to increase the efficiency of our packing facilities. To date we have capitalized approximately $20.3 million and during the nine months ended July 31, 2015 we capitalized approximately $11.7 million of costs in connection with construction services and equipment. The project is expected to cost approximately $23 million and be operational in 2015.

On February 3, 2015, we amended our lease agreement with Cadiz Real Estate, LLC (“Cadiz”). The amendment, among other things; increased by 200 acres the amount of property leased by us under the lease agreement dated July 1, 2013. In connection with the amendment, we paid a total of $1.2 million to acquire existing lemon trees and irrigations systems from Cadiz and a Cadiz tenant.

On February 17, 2015, the City of Santa Paula unanimously approved our updated East Area 1 Master Tentative Tract Map, Supplemental Environmental Impact Report and updated Development Agreement. The property is now fully entitled and we have the requisite approvals to break ground on the Santa Paula Gateway (East Areas 1 and 2) project. 

On June 24, 2015, we declared a $0.045 per share dividend which was paid on July 15, 2015 in the aggregate amount of approximately $0.6 million to common shareholders of record as of July 6, 2015.

In July 2015, we entered into a purchase agreement to acquire 157 acres of lemon, orange and specialty citrus orchards in California’s San Joaquin Valley, for approximately $3.3 million. The orchards are being acquired pursuant to purchase options contained in certain operating leases we have had since 2012 for approximately 1,000 acres of lemon, orange and specialty citrus and other crops, which we refer to as the Sheldon Ranch leases. The Company paid a deposit of $50,000 and escrow is expected to close in September 2015.

In September 2015, we entered into a purchase agreement to acquire 757 acres of lemon, orange and specialty citrus orchards in California’s San Joaquin Valley, for approximately $15.1 million. The orchards are being acquired pursuant to purchase options contained in the Sheldon Ranches operating leases which we have had since 2012. The Company paid a deposit of $50,000 and escrow is expected to close in November 2015.

On August 21, 2015, we sold our Wilson Ranch, which is comprised of 52 acres of land with 33 acres of avocado orchards located in Ventura County, California. The sales price was approximately $2.8 million and the gain on the sale was approximately $0.9 million. The sales price represents approximately $53,000 and $83,000 per acre for total acres and productive avocado acres, respectively.

In September 2015, we entered into a Contribution Agreement with an affiliate of Lewis Operating Corp. (“Lewis”), a Southern California land developer, that facilitates upon the completion of certain conditions, the formation of a joint venture for the purpose of developing the Company’s East Area 1 real estate development project (the “Joint Venture”). We were paid a $2.0 million deposit upon entering into the Contribution Agreement. Conditions necessary to close the transaction and form the Joint Venture include approval by the City of Santa Paula of an amendment to the East Area 1 tentative tract map, assignment of various development rights and obligations by us to the Joint Venture, completion of a legal parcel map and contribution of the East Area 1 property to the Joint Venture and the payment by Lewis of $18.0 million, comprising total consideration of $20.0 million for a 50% interest in the Joint Venture. The Contribution Agreement also includes an agricultural lease that allows us to continue farming the property during the phased build-out of the project. We expect to receive $100.0 million from the Joint Venture over the estimated 7 to 10 year life of the project. The Joint Venture partners will share equally in capital contributions to fund project costs until loan proceeds and or revenues are sufficient to fund the project. These funding requirements are currently estimated to total $10.0 to $15.0 million for each Joint Venture partner in the first two years of the project. In addition, upon closing the transaction, we are expected to incur a minimum Capital Placement fee to a consultant of approximately $0.5 million plus 2% of the initial land value received by us in excess of $100.0 million to be earned on the successful closing of the Joint Venture transaction.

Results of Operations

The following table shows the results of operations for the three and nine months ended July 31:

Non-GAAP Financial Measures

Due to significant depreciable assets associated with the nature of our operations and interest costs associated with our capital structure, management believes that earnings before interest, income taxes, depreciation and amortization (“EBITDA”) and adjusted EBITDA, which excludes impairments on real estate development assets when applicable, is an important measure to evaluate our Company’s results of operations between periods on a more comparable basis. Such measurements are not prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and should not be construed as an alternative to reported results determined in accordance with GAAP. The non-GAAP information provided is unique to our Company and may not be consistent with methodologies used by other companies. EBITDA is summarized and reconciled to net income which management considers to be the most directly comparable financial measure calculated and presented in accordance with GAAP as follows:

Third Quarter of Fiscal Year 2015 Compared to the Third Quarter of Fiscal Year 2014

Revenues

Total revenue for the third quarter of fiscal year 2015 was $29.8 million compared to $36.5 million for the third quarter of fiscal year 2014. The 18% decrease of $6.7 million was primarily the result of decreased agribusiness revenue, as detailed below:

Costs and Expenses

Our total costs and expenses in the third quarter of fiscal year 2015 were $22.0 million compared to $23.1 million in the third quarter of fiscal year 2014, for a 5% decrease of $1.1 million. This decrease was primarily attributable to decreases in our agribusiness costs, real estate development expenses and selling, general and administrative expenses. Costs associated with our agribusiness include packing costs, harvest costs, growing costs, costs related to the fruit we procure and sell for third-party growers and depreciation expense. These costs are discussed further below:

Real estate development expenses in the third quarter of fiscal year 2015 were $0.3 million compared to $0.9 million during the same period in fiscal year 2014. In July 2014, we recognized an impairment charge of $0.4 million on our Templeton Santa Barbara, LLC real estate development project. There were no impairment charges recognized in the third quarter of fiscal year 2015.

Selling, general and administrative expenses in the third quarter of fiscal year 2015 were $3.3 million compared to $3.6 million during the same period in fiscal year 2014. The $0.3 million decrease in the third quarter of fiscal year 2015 is primarily due to decreased incentive compensation of $0.9 million partially offset by increased legal and consulting expenses of $0.5 million associated with our East Area 1 real estate development project.

Other Income/Expense

Other income (expense), net was $0.3 million of income for the third quarter of fiscal year 2015 compared to $0.2 million of income for the third quarter of fiscal year 2014. The approximately $0.1 million increase in income in the third quarter of fiscal year 2015 was primarily due to increased equity in earnings of our investment in Limco Del Mar, Ltd. compared to the same period in fiscal year 2014.

Income Taxes

We recorded an estimated income tax provision of $2.8 million in the third quarter of fiscal year 2015 on pre-tax income of $8.1 million compared to an estimated income tax provision of $4.6 million on pre-tax income of $13.5 million in the third quarter of fiscal year 2014. Our projected annual effective tax rate for fiscal year 2015 is approximately 35.3%.

Nine Months Ended July 31, 2015 Compared to the Nine Months Ended July 31, 2014

Revenues

Total revenue for the nine months ended July 31, 2015 was $86.1 million compared to $87.2 million for the nine months ended July 31, 2014. The 1% decrease of $1.1 million was primarily the result of decreased agribusiness revenues as detailed below:

Costs and Expenses

Total costs and expenses for the nine months ended July 31, 2015 were $76.6 million compared to $72.7 million for the nine months ended July 31, 2015, for a 5% increase of $3.9 million. This increase was primarily attributable to increases in our agribusiness costs partially offset by decreased real estate development expenses and selling, general and administrative expenses. Costs associated with our agribusiness include packing costs, harvest costs, growing costs, costs related to the fruit we procure for third-party growers and depreciation expense. These costs are discussed further below:

Real estate development expenses in the nine months ended July 31, 2015 were $0.8 million compared to $1.5 million during the same period in fiscal year 2014. In July 2014, we recognized an impairment charge of $0.4 million on our Templeton Santa Barbara, LLC real estate development project. There were no impairment charges recognized in the nine months ended July 31, 2015.

Selling, general and administrative expenses in the nine months ended July 31, 2015 were $10.1 million compared to $10.3 million during the same period in fiscal year 2014. The $0.2 million decrease in the nine months ended July 31, 2015 was primarily due to decreased incentive compensation of $1.1 million partially offset by increased legal and consulting expenses of $0.7 million associated with our East Area 1 real estate development project.

Other Income (Expense)

Other income, net in the nine months ended July 31, 2015 was similar to the nine months ended July 31, 2014 at $0.4 million.

Income Taxes

We recorded an estimated income tax provision of $3.5 million in the nine months ended July 31, 2015 on a pre-tax income of $9.9 million compared to an estimated income tax provision of $5.0 million on a pre-tax income of $14.9 million in the nine months ended July 31, 2014. Our projected annual effective tax rate for fiscal year 2015 is approximately 35.3%.

Segment Results of Operations

We evaluate the performance of our agribusiness, rental operations and real estate development segments separately to monitor the different factors affecting financial results. Each segment is subject to review and evaluations related to current market conditions, market opportunities and available resources. The following table shows the segment results of operations for the three and nine months ended July 31, 2015 and 2014:

Third Quarter of Fiscal Year 2015 Compared to the third Quarter of Fiscal Year 2014

The following analysis should be read in conjunction with the previous section “Results of Operations”.

Agribusiness

For the third quarter of fiscal year 2015, our agribusiness segment revenue was $28.5 million compared to $35.2 million for the third quarter of fiscal year 2014. The 19% decrease of $6.7 million primarily consisted of the following:

Costs associated with our agribusiness segment include packing costs, harvest costs, growing costs, costs related to the fruit we procure and sell for third-party growers and depreciation expense. For the third quarter of fiscal year 2015, our agribusiness costs were $17.5 million compared to $17.8 million for the third quarter of fiscal year 2014. The 2% decrease of $0.3 million primarily consisted of the following:

Rental Operations

For the third quarter of fiscal year 2015 our rental operations had revenues of $1.3 million compared to $1.2 million in the third quarter of fiscal year 2014. The $0.1 million increase in the third quarter of fiscal year 2015 was primarily due to additional rental revenue from our agriculture workforce housing units that we began renting in May 2015.

Costs and expenses in our rental operations segment were $0.9 million and $0.8 million in the third quarters of fiscal years 2015 and 2014, respectively. Depreciation expense was similar quarter to quarter at approximately $0.1 million.

Real Estate Development

Our real estate development segment had no significant revenues in the third quarters of fiscal years 2015 and 2014.

Costs and expenses in our real estate development segment were $0.3 million and $0.9 million in the third quarters of fiscal years 2015 and 2014, respectively.

Corporate and Other

Corporate costs and expenses include selling, general and administrative costs and other costs not allocated to the operating segments. Corporate and other costs for the third quarter of fiscal year 2015 were $3.3 million compared to $3.6 million for the third quarter of fiscal year 2014. Depreciation expense was similar quarter to quarter at approximately $50,000.

Nine Months Ended July 31, 2015 Compared to the Nine Months Ended July 31, 2014

The following analysis should be read in conjunction with the previous section “Results of Operations”.

Agribusiness

For the nine months ended July 31, 2015, our agribusiness segment revenue was $82.3 million compared to $83.5 million for the nine months ended July 31, 2014. The 1% decrease of $1.2 million primarily consisted of the following:

Costs associated with our agribusiness segment include packing costs, harvest costs, growing costs, costs related to the fruit we procure and sell for third-party growers and depreciation expense. For the nine months ended July 31, 2015, our agribusiness costs and expenses were $63.3 million compared to $58.7 million for the nine months ended July 31, 2014. The 8% increase of $4.6 million primarily consisted of the following:

Rental Operations

Our rental operations segment had revenues of approximately $3.8 million and $3.5 million in the nine months ended July 31, 2015 and 2014, respectively. The $0.3 million increase in the third quarter of fiscal year 2015 was primarily due to additional rental revenue from our agriculture workforce housing units that we began renting in May 2015 and increased organic recycling and other revenue.

Costs in our rental operations segment were approximately $2.5 million and $2.2 million for the nine months ended July 31, 2015 and 2014, respectively. Depreciation expense was $0.4 million and $0.3 million for the nine months ended July 31, 2015 and 2014, respectively.

Real Estate Development

Our real estate development segment had revenues of approximately $0.1 million and $0.2 million in the nine months ended July 31, 2015 and 2014, respectively.

Real estate development costs and expenses were approximately $0.8 million and $1.5 million for the nine months ended July 31, 2015 and 2014, respectively.

Corporate and Other

Corporate costs and expenses include selling, general and administrative costs and other costs not allocated to the operating segments. Corporate and other costs for the nine months ended July 31, 2015 were $0.3 million lower than the nine months ended July 31, 2014. Depreciation expense was similar period to period at approximately $0.1 million.

Seasonal Operations

Historically, our agribusiness operations have been seasonal in nature with quarterly revenue fluctuating depending on the timing and variety of crops being harvested. Cultural costs in our agribusiness tend to be higher in the first and second quarters and lower in the third and fourth quarters because of the timing of expensing cultural costs in the current year that were inventoried in the prior year. Our harvest costs generally increase in the second quarter and peak in the third quarter coinciding with the increasing production and revenue. Due to this seasonality and to avoid the inference that interim results are indicative of the estimated results for a full fiscal year, we present supplemental information for 12-month periods ended at the interim date for the current and preceding years.

Results of Operations for the Trailing Twelve Months ended July 31, 2015 and July 31, 2014

The following table shows the unaudited results of operations for the trailing twelve months ended:

Twelve Months Ended July 31, 2015 Compared to the Twelve Months Ended July 31, 2014

The following analysis should be read in conjunction with the previous section “Results of Operations”.

Liquidity and Capital Resources

Overview

Our Company’s liquidity and capital position fluctuates during the year depending on seasonal production cycles, weather events, and demand for our products. Typically, our second and third quarters tend to generate greater operating income than our first and fourth quarters due to the volume of fruit harvested. To meet working capital demand and investment requirements of our agribusiness and real estate development segments and to supplement operating cash flows, we utilize our revolving credit facility to fund agricultural inputs and farm management practices until sufficient returns from crops allow us to repay amounts borrowed. Raw materials needed to propagate the various crops grown by us consist primarily of fertilizer, herbicides, insecticides, fuel and water and are readily available from local sources.

For the nine months ended July 31, 2015 and 2014, net cash provided by operating activities was $10.2 million and $17.8 million, respectively. The significant components of our Company’s cash flows provided by operating activities as included in the unaudited consolidated statements of cash flows are as follows:

Cash Flows from Investing Activities

For the nine months ended July 31, 2015, net cash used in investing activities was $24.0 million compared to net cash used in investing activities of $15.2 million during the same period in fiscal year 2014.

Net cash used in investing activities is primarily comprised of capital expenditures. Capital expenditures were $23.7 million in the nine months ended July 31, 2015, comprised of $18.5 million for property, plant and equipment primarily related to construction and equipment for our lemon packing facilities of $11.7 million and additional farm worker housing units of $6.2 million and $5.2 million for real estate development projects including $1.7 million for vineyard development at our Windfall Farms Project. Capital expenditures were $14.9 million in the nine months ended July 31, 2014, comprised of $11.0 million for property, plant and equipment primarily related to construction and equipment for our lemon packing facilities of $3.4 million, additional farm worker housing units of $3.6 million and orchard development of $1.9 million, $3.2 million for real estate development projects including $1.1 million for vineyard development at our Windfall Farms Project and $0.7 million for the acquisition of a lemon packing house.

Cash Flows from Financing Activities

For the nine months ended July 31, 2015, net cash provided by financing activities was $13.8 million compared to net cash used in financing activities of $3.0 million during the same period in fiscal year 2014.

The $13.8 million of cash provided by financing activities during the nine months ended July 31, 2015 is comprised primarily of net borrowings of long-term debt in the amount $16.4 million. The $3.0 million of cash used in financing activities during the nine months ended July 31, 2014 is comprised primarily of net payments of long term debt in the amount of $10.0 million and net proceeds from our issuance of preferred stock in the amount of $9.3 million. Additionally, we paid common and preferred dividends of $2.4 million in the nine months ended July 31, 2015 compared to $2.0 million during the same period in fiscal year 2014.

Transactions Affecting Liquidity and Capital Resources

We finance our working capital and other liquidity requirements primarily through cash from operations and our Rabobank, NA revolving credit facility (the “Rabobank Credit Facility”). In addition, we have term loans with Farm Credit West, FLCA (each a “Farm Credit West Term Loan” and, collectively, the “Farm Credit West Term Loans”) and a non-revolving line of credit with Farm Credit West, PCA (the “Farm Credit West Line of Credit”). Additional information regarding the Rabobank Credit Facility, the Farm Credit West Term Loans and the Farm Credit West Line of Credit can be found in the notes to the unaudited consolidated financial statements included elsewhere in this Form 10-Q.

We believe that the cash flows from operations and available borrowing capacity from our existing credit facilities will be sufficient to satisfy our capital expenditures, debt service, working capital needs and other contractual obligations for the remainder of fiscal year 2015. In addition, we have the ability to control a portion of our investing cash flows to the extent necessary based on our liquidity demands.

In December 2013, we entered into a construction contract that includes design and construction services for the expansion of our lemon packing facilities.  The project is expected to increase the efficiency our packing facilities. To date we have capitalized approximately $20.3 million and during the nine months ended July 31, 2015, we capitalized approximately $11.7 million of costs in connection with construction services and equipment. The project is expected to cost approximately $23 million and be operational in 2015.

Rabobank Revolving Credit Facility

As of July 31, 2015, our outstanding borrowings under the Rabobank Credit Facility were $78.7 million and we had $15.1 million of availability. The Rabobank Credit Facility currently bears interest at a variable rate equal to the one month LIBOR plus 1.80%. The interest rate resets on the first of each month and was 1.99% at July 31, 2015. We have the ability to prepay any amounts outstanding under the Rabobank Credit Facility without penalty. The line of credit provides for maximum borrowings of $100.0 million and the borrowing capacity based on collateral value was $93.8 million at July 31, 2015.

Our Company has the option of fixing the interest rate under the Rabobank Credit Facility on any portion of outstanding borrowings using interest rate swaps. Effective July 2013, our Company fixed the interest rate at 4.30% utilizing an interest rate swap on $40.0 million of the Rabobank Credit Facility. Additional information regarding the interest rate swap can be found in the notes to the unaudited consolidated financial statements included elsewhere in this Form 10-Q.

The Rabobank Credit Facility is secured by certain of our Company’s agricultural properties and a portion of the equity interest in the San Cayetano Mutual Water Company, and subjects our Company to affirmative and restrictive covenants including, among other customary covenants, financial reporting requirements, requirements to maintain and repair any collateral, restrictions on the sale of assets, restrictions on the use of proceeds, prohibitions on the incurrence of additional debt and restrictions on the purchase or sale of major assets. We are also subject to a covenant that our Company will maintain a debt service coverage ratio, as defined in the Rabobank Credit Facility, of less than 1.25 to 1.0 measured annually at October 31, with which we were in compliance at October 31, 2014.

Farm Credit West Term Loans and Non-Revolving Credit Facility

As of July 31, 2015, we had an aggregate of approximately $6.1 million outstanding under the Farm Credit West Term Loans and Farm Credit West Line of Credit. The following provides further discussion on the term loans and non-revolving credit facility:

The Farm Credit West Term Loans and Farm Credit West Line of Credit contain various conditions, covenants and requirements with which our Company and Windfall Investors, LLC must comply. In addition, our Company and Windfall Investors are subject to limitations on, among other things, selling, abandoning or ceasing business operations; merging or consolidating with a third party; disposing of a substantial portion of assets by sale, transfer, gifts or lease except for inventory sales in the ordinary course of business; obtaining credit or loans from other lenders other than trade credit customary in the business; becoming a guarantor or surety on or otherwise liable for the debts or obligations of a third party; and mortgaging, pledging, leasing for over a year, or otherwise making or allowing the filing of a lien on any collateral.

Interest Rate Swap

We enter into interest rate swap agreements to manage the risks and costs associated with our financing activities. At July 31, 2015, we had an interest rate swap agreement which locks in the interest rate on $40.0 million of our $84.8 million in debt at 4.30% until June 2018. Additional information regarding the interest rate swap can be found in the notes to the unaudited consolidated financial statements included elsewhere in this Form 10-Q. The remaining $44.8 million of debt bears interest at variable rates, which were 2.75% or less at July 31, 2015.

Contractual Obligations

The following table presents our Company’s contractual obligations at July 31, 2015 for which cash flows are fixed and determinable: